Barclays_Overview_A_curious_balance

This document is intended for institutional investors and is not subject to all of theindependence and disclosure standards applicable to debt research reports prepared for retailinvestors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for itsown account and on a discretionary basis on behalf of certain clients. Such trading interestsmay be contrary to the recommendations offered in this report.Please see analyst certifications and important disclosures beginning on page 23.OverviewA curious balanceAfter a turbulent 2025, the US enters 2026 in a curiousbalance of softening labor markets vs. stable growth, fallinginflation vs. easier fiscal policy, and broad-based demand vs.rising duration supply. The front end should rally as the Fedcuts, but long-term yields should remain elevated.Key Takeaways• In 2025, the administration's policies triggered significant volatility, with fears ranging from arecession to "Sell America," a fiscal crisis and threats to Fed independence. Ultimately, yieldsmoved lower across the curve, as fiscal concerns eased and labor markets softened. Despitepersistent commentary on fiscal indiscipline, the long end outperformed its global peers(Figure 1 and Figure 2).• We forecast 2y, 5y, 10y, and 30y yields to end 2026 at 3.1%, 3.5%, 4.0%, and 4.7%,respectively, 40bp below forwards at the front end and 10bp at the long end (Figure 3). The2s30s Treasury curve should steepen to 160bp. Front-end yields should decline as the Fedcuts towards neutral and the market prices in a premium for more aggressive cuts. Termpremium compression at the long end due to falling inflation should be offset by lingeringfiscal uncertainty and heavy duration supply.• Risks to the outlook: Downside risks include a deeper Fed easing cycle if labor marketsweaken more sharply or the Fed reaction function turns decisively dovish, which would pullfront-end yields below 3% and accelerate bull steepening. Upside risks stem from renewedfiscal expansion ahead of midterms or heavier-than-expected long-end credit issuance, whichwould push 10y and 30y yields higher. Seasonals favor a sell-off in February and rallies insummer.• Nominal GDP growth should moderate over 2026, with real GDP growth near 2% andinflation falling towards the Fed's 2% target, pulling front-end yields lower. The outlook forpersonal income and consumption growth is modest and AI investments should boostgrowth, but less so than in 2025. Inflation progress should resume amid ongoing disinflationin core services and fading tariff effects. Annualized core PCE inflation will likely not be farabove the 2% target in H2 26.• The Fed's reaction function will be in focus with a new Fed chair, the Supreme Court rulingon Cook and Powell's potential departure in May. In addition, the rotation of Fed presidentsFICC ResearchInterest Rates2 December 2025SIGNATUREAnshul Pradhan+1 212 412 3681anshul.pradhan@barclays.comBCI, USDemi Hu, CFA+1 212 526 7398demi.hu@barclays.comBCI,